Question

keesha company borrows $120,000 cash on november 1 of the current year by signing a 180 - day, 7%, $120,000 note. complete this question by entering your answers in the tabs below. req 1 req 2 and 3 req 4 prepare journal entries to record (a) issuance of the note, (b) accrual of interest on december 31, and (c) payment of the note at maturity. note: use 360 days a year. do not round intermediate calculations. view transaction list journal entry worksheet 1 2 3 record the interest accrued on the note as of december 31, current year. note: enter debits before credits.

Explanation:

Step1: Calculate interest for 2 months (Nov - Dec)

The interest formula is $I = P\times r\times t$, where $P=\$120000$, $r = 7\%=0.07$, and $t=\frac{60}{360}$ (60 days from Nov 1 - Dec 31). So $I=120000\times0.07\times\frac{60}{360}=\$1400$.

Step2: Journal - entry for issuance of note

On November 1, the company receives cash and incurs a liability. The journal entry is:
Debit: Cash $120000
Credit: Notes Payable $120000

Step3: Journal - entry for interest accrual

On December 31, we accrue the interest expense. The journal entry is:
Debit: Interest Expense $1400
Credit: Interest Payable $1400

Step4: Calculate remaining interest and journal - entry for payment at maturity

The remaining interest for the period from Jan 1 - maturity (180 - 60 = 120 days) is $I = 120000\times0.07\times\frac{120}{360}=\$2800$.
The total amount to be paid at maturity is the principal plus total interest ($120000 + 1400+2800=\$124200$).
The journal entry is:
Debit: Notes Payable $120000
Debit: Interest Payable $1400
Debit: Interest Expense $2800
Credit: Cash $124200

Answer:

Issuance of note:
Debit: Cash $120000
Credit: Notes Payable $120000

Accrual of interest on Dec 31:
Debit: Interest Expense $1400
Credit: Interest Payable $1400

Payment of note at maturity:
Debit: Notes Payable $120000
Debit: Interest Payable $1400
Debit: Interest Expense $2800
Credit: Cash $124200